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Yields mixed at TDF auction

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By Lee C. Chipongian

With more liquidity in the system, the central bank’s weekly term deposit facility (TDF) had higher bids this week of P80.89 billion versus the previous Wednesday’s P68.09 billion, exceeding the auction offer of P50 billion.

MB file photo.

MB file photo.

Bangko Sentral ng Pilipinas (BSP) Deputy Governor Diwa C. Guinigundo said their assessment of liquidity condition remains consistent.

“Banks continue to be more liquid. Remember January BOP (balance of payments) was in surplus and that means, there is actual additional inflow of liquidity in the system. Bottomline: the system remains liquid. That’s the reason why there were oversubscriptions across all tenors with interest rates showing some decline. All consistent with a liquid system,” explained Guinigundo.

The January BOP suplus was sustained at $2.70 billion, from December and Novemner 2018’s surpluses of $2.44 billion and $847 million, respectively.

Guinigundo said the surplus was because both foreign direct investments and portfolio investments were “resilient and strong despite the continuing shortfall in both the current and trade accounts.”

“This also resulted from BSP FX (foreign exchange) operations including the inflow of interest income from FX investments abroad,” he added.

The 7-day TDF’s rate fell to 5.1248 percent this week from 5.1565 percent, while bids again surpassed the offer of P20 billion at P38.12 billion. Tenders were higher compared to February 13’s P28.08 billion, based on BSP data.

Also offered at P20 billion, the 14-day tenor attracted P33.59 billion versus P27.26 billion last week. Yields were up at 5.1659 percent from 5.1250 percent last Wednesday.

Guinigundo said they are reviewing constantly several options to finetune the auction-based open market operations, as they forecast ample liquidity for some time. Liquidity supply will come from the government’s “sustained disbursement” for infrastructure development spending. Money supply will be redeposited to the banking system for lending and/or placed with the BSP.

The longest-dated TDF, the 28-days which is offered at P10 billion, had lower bids amounting to P9.18 billion, also down from the previous week’s P12.75 billion. Average rate slipped to 5.1822 percent from 5.1839 percent last week.

TDF, first implemented in 2016 as guide for influencing market rates closer to the policy rate, is primarily a liquidity management tool. It was implemented when the the central bank shifted to the interest rate corridor framework.

Two years after the first TDF auction, the BSP decided to cut banks’ reserve requirement (RR) ratio by 200 basis points (bps) in 2018, confident that it will not be inflationary since the P190-billion excess liquidity released into the financial system will be reabsorbed back by the BSP through the TDF, thus the move is policy neutral.

The market is expecting the BSP to again reduce the RR ratio by another 200 bps this year, however as Guinigundo has been saying, it is a matter of timing.

ING Bank’s senior economist Nicholas Mapa in a commentary Wednesday said the market is basically expecting an RR cut of 200 bps per year until it reaches single digit level. The reserves’ ratio is currently at 18 percent.

“Early on in 2018 we saw (BSP Governor Nestor A.) Espenilla cutting rates in the face of high liquidity and accelerating inflation, undaunted by market analysts’ calls to wait for a both inflation and liquidity to decelerate,” noted Mapa. “In the second half of 2018, (Espenilla) changed his tune after meeting with the IMF (International Monetary Fund) indicating that he would ‘resume next year just as inflation returns to target based on our forecast’”.

“The question now is whether he will wait for inflation to simply return to target or if he is waiting for inflation to become well-entrenched within target before he strikes again,” said Mapa.

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